Nxera Pharma Co., Ltd. (4565) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Chris Cargill, CFO of Sosei Group Corporation. Today, we're going to talk about the financial results for the 6-month period ended the 30th of June 2020. Today's speakers will be the CEO, Mr. Shinichi Tamura; and myself. Firstly, I'll begin with an outline of the financial results for the 6-month period ended June 2020 and then the CEO will talk about business highlights and strategy updates. I'll begin on Slide 5. Well, as many of you know, in March 2020, COVID-19 was declared a global pandemic by the World Health organization. Despite the difficult situation, we were well prepared as a company and rapidly enacted our business continuity plans. As a result, we kept our core R&D facility operational throughout the entire U.K. lockdown to support our global partnerships. Scientific productivity has remained very high, as evidenced by the new deal with AbbVie worth over $400 million to us. This deal has the potential to expand beyond a single-target deal into a multi-target deal, with AbbVie having the option to nominate 3 additional targets in the future. We also made great progress in the period with the underlying pipeline as we nominated 3 new preclinical candidates to progress forward, and all of these programs are targeting large patient populations. We expect these programs to become the source of new business development deals in the future. Revenues in the period declined. However, this was primarily due to a lack of new upfront fees and milestone income. And it is worth mentioning that the prior comparative period included a one-off milestone of $15 million from AstraZeneca for the commencement of the Phase II study of AZD4635 last year. Our royalty revenues increased from sales of products in the Novartis-Ultibro Group portfolio. We achieved a small cash loss of JPY 181 million, which reflected the underlying cash flow strength of our business. Our net loss after tax was JPY 2.1 billion, and this was primarily due to a paper tax charge of JPY 847 million. Now as we made a net loss, the tax charge does appear slightly counterintuitive. However, this has been calculated independently, and we expect the charge to reverse and generate a tax credit at the year-end. Please turn to Slide 6. Now we generated positive cash flow in the period, growing out our cash balance. This reflects the advantage of our uniquely diversified biotech business model, which does result in a more sustainable profile. Lastly, we launched an international capital raising to support our aggressive growth strategy. The transaction was highly successful, and net proceeds of JPY 21 billion were received after the period closed. CEO, Shinichi Tamura, will later discuss this in detail and specifically how the new funds will be deployed. In summary, a period filled with many challenges, however, our model has demonstrated its resilience, and we are well positioned to grow aggressively. Please turn to Slide 7. You can see here on the blue section of the chart the effect of having that one-off $15 million milestone from AstraZeneca in the prior comparative period. Regarding upfront fees and milestone income for the current period, our new deal with AbbVie in June generated a USD 10 million upfront fee, and this was received as cash. Under IFRS 15 revenue recognition accounting, we recognized $3 million of this upfront fee, an immediate revenue in the period. The balance of $7 million is treated as deferred revenue in the balance sheet and this balance will be released to the P&L as revenue over time. In the period, we also received other small milestones from Genentech, Daiichi Sankyo and Novartis. Our royalty revenues from Novartis grew slightly. And as we reported in the period, Enerzair has now been approved in Japan and the EU, and we expect product to launch later this year in those markets. Following launch, we expect Enerzair to start contributing to our royalty revenue line. Lastly, other revenues were stable, which reflected the fact that we maintained a good level of paid contract research activity for our global partners. Please turn to Slide 8. This slide shows the group's P&L breakdown for the 6-month period ended 30 June, 2020. Now we always manage costs tightly, and this is now ever more important because of the COVID-19 pandemic. Our cash R&D expenses decreased as we successfully recovered excess charges of over $1 million from a supplier. Furthermore, COVID-19-related delays, and then we were able to slow down some planned expenditure in the first half. We will increase the rate of spending in the second half of this year as we look to rapidly scale up our R&D programs. As I mentioned at the outset, we had a paper tax charge in the period despite not making a P&L profit. And to be clear, it is not a cash tax charge. The tax calculation has been independently reviewed and is correct under IFRS accounting. We expect it to reverse and generate a tax credit at the year-end. Turning to Slide 9 now. This slide highlights the group's balance sheet as at 30 June 2020, and our balance sheet remains strong. Despite the challenges of COVID-19, we continue to generate cash in the period, which is unique for a biotech company. And this can be seen on the cash flow bridge chart on the slide. We finished the period with cash at hand of JPY 15.4 billion or approximately USD 143 million. We are well capitalized to execute on our core research activities and organic growth plan for the next 3 years. After the period ended, we completed a JPY 21 billion capital raising or approximately USD 195 million. In the appendix, we have prepared a summary of the pro forma balance sheet for shareholders. Please turn to Slide 10. This slide shows our guidance for the financial year 2020. Now we will continue to focus on our core competencies in drug discovery and early development to deliver a sustainable growth biotech business. Our cash R&D expenses remain unchanged. And we expect them to be in the range of JPY 4.2 billion to JPY 4.7 billion. This R&D guidance covers our plans to: one, increase the number of programs fully funded by global partners; two, extract savings from enhanced procurement practices; and three, increase our R&D headcount to support planned growth in our pipeline. Our cash G&A expenses also remain unchanged, and we expect these to be in the range of JPY 1.8 billion to JPY 2.3 billion. Key areas of focus for the remainder of financial year 2020 will be: implementing our new Oracle NetSuite ERP system by July 2021, and this will drive group-wide efficiencies and eliminate control issues. We will continue to replace IT, legacy IT systems and continue digital transformation. We are investing in the future whilst maintaining a strict focus on costs and extracting efficiencies. Please turn to Slide 11. This slide relates to the capital raising, which was completed after the end of the relevant period. As I mentioned, we successfully raised JPY 21 billion or approximately USD 195 million in long-term growth capital, and this is earmarked to accelerate our strategic growth plan. Our pro forma cash balance as of today's date is just over JPY 36 billion or about USD 335 million. The capital raising was the largest biotech-focused deal out of Japan this year. We received strong levels of support from international investors, and these international investors are supportive of our strategic growth plan. We are now focused on securing a transformative acquisition to secure long-term revenue growth. And our aim is to create a combined company with over JPY 10 billion or approximately USD 100 million in annual revenues each year. We will also make investments to future-proof our drug discovery platform and expand to new target classes. I will now hand over to CEO, Shinichi Tamura, who will provide an operational summary and more detail about the strategic growth plan. Thank you.

Thank you, Chris. Good afternoon. This is Shinichi Tamura. As Chris mentioned, we have continued to make excellent progress across the entire business, despite a COVID-19 pandemic on a certain operating environment. We continue to demonstrate a drug discovery leadership of GPCRs. In line with this strategy execute, at least 2 high-value partnership every year, we executed a new multi-hundred million dollar discovery deals with AbbVie. This deal is negotiated completely virtually through the peak of the COVID-19 pandemic. AbbVie has an option to expand this deal by another 3 targets, taking potential deal economics over $1 billion. It is their retailer. The third commercial product to merge with -- 2005 acquisition of Arakis was approved in Japan for uncontrollable asthma. It was are also approved in the EU and Canada in July, with more approvals expected later this year. Novartis is excited about this product, which comes with a [ digital ] sensor, the first of its kind globally. We achieved the scientific breakthrough at Orexia, which triggered next tranche of funding from Medicxi. Next slide, please. We initiated COVID-19 research program to identify the compounds that block the MPro protease activity of the SARS-CoV-2 and its future variance. We will donate all the findings for the global research community as a gesture of the responsibility of the company operating their health care sector. Lastly, as Chris mentioned, we launched the international capital raising to support aggressive strategic growth following Arakis and Heptares acquisitions. Next slide. I wanted to highlight how our swift action maintained business continuity throughout the peak of the COVID-19 pandemic resulted in a minimum disruption to our scientific activity. Unlike many biotech business in the U.K., we have been able to remain operational due to the measures we implemented, such as remote working, optimized rotas, reduced physical staffing, weekly SARS-CoV-2 testing of the employees. In our core drug discovery business, namely platform, chemistry and pharmacology, productivity was tracking at 90% versus the same period last year. And we're exploring the way to further enhance this in the second half. Next slide. In February, outlined a number of goals we set up for the 2020, and we are on track to meet these goals by the year-end. I've already mentioned the scientific breakthrough at Orexia as we pursue the novel treatment of narcolepsy, the new potential billion dollar drug discovery with AbbVie and the approval of the Enerzair and Breezhaler. Importantly, we nominated 3 new preclinical candidates that we intend to take forward towards the clinical trials, potentially to fuel new high-value partnership over the coming years. Our BD team's working hard, achieving goals for items 5 and 6 as well. Next slide. Now I'd like to give an update on our strategic planning. Firstly, organic growth plan. The organic growth plan is focused on building the world-leading drug discovery business based on the GPCRs. This started with the acquisition of Heptares in 2015. We are seeding new assets every year and to broaden the deep pipeline that will fuel multiple high-value partnerships and co-owned investment for the many years to come. Our unique model, which is balanced mixed partner and enhanced programs, means we can fund this growth, largely from the existing cash flows. This plan has not changed. This the plan shareholders [ winning ] with. It's the plan I implemented when I returned to the CEO in January 2019. Next slide. Over the next few slides, I will talk about the organic growth plan and how we're meeting our objectives. The center of the productivity is the STaR technology and SBDD platform. In the past 10 years, the platform has generated 24 novel preclinical candidates and 7 clinical candidates. We have benchmarked U.K. peers in Oxford and Cambridge by the [ cups ], and found that we are one of the most productive biotech companies in the U.K., given our size. Going forward, over the medium term, we'll continue this leading level of productivity with the GPCR programs alone. We'll seed 4 new programs into lead optimization phase every 2 years. We aim to nominate 2 new preclinical candidates every year. This will be targeting a large addressable patient populations. We'll be more efficient, narrowing our focus to novel first-in-class targets across immunology, neurology and GI where there's a validated biology. We will focus on the core competence on the small molecule for drug discovery. This is a railroad of the pharmaceutical R&D. We will leave the peptide and the monoclonal antibodies and other modalities of [ Atlas ]. Next slide. I just said, our goal is to continue feeding a broad and deep pipeline with novel high-quality assets and that our target is generating at least 2 new preclinical candidates per year. I'm proud to say that we have already achieved this target, having nominated and funded 3 new preclinical candidates to progress closed clinical studies. We expect to nominate 1 more clinical candidate by the year-end in the neurology space. We now have over 40 programs ongoing in total across both the partner and in-house pipeline. And we'll continue to add more every year. Next slide. A core part out of the balanced organic growth plan is to execute at least 2 new high-value partnership and co-own investment every year. To partner the co-own model is ideal for the company at an evolutional stage. It allows us to make moderate-level investment risks but still remain highly rewarding. Put simply, we use other people's money to finalize, develop and advance approximately 50% of the total pipeline programs. We are fortunate that our drug discovery platform generates more novel candidates that we can possibly work by ourselves. And therefore, we'll continue to execute high-value drug discover deals, similar to Pfizer, Genentech and AbbVie. We'll seed and co-own investment similar to Orexia in order to maintain momentum in this pipeline. Next slide. I just said, our goal is to execute at least 2 new high-value partnerships per year. We have delivered -- we're delivering on this target. In this period, we executed new deal discovery collaboration and option to license deal with AbbVie. The deal combines AbbVie's more than 2 decades of expertise in immunology with a cutting-edge technology on GPCRs. The deal is worth over $400 million to us initially, and AbbVie has an option to expand and select up to 3 additional candidates. And the total transaction economy will be over $2 billion, if that's executed, I mean, plus royalties. Next slide. It has been an incredible last 12 months at Sosei Heptares. The new deal with AbbVie is the latest of the three measure executed in the past 12 months alone, following the Q2 closing last year. We are planning to keep this momentum. And a global BD team is conducting all meetings virtually with no reduction activity. We'll not stop until we have signed these sort of deals with every top 20 pharma and biotech companies in the world. We have so far achieved 4 with Pfizer, Genentech and AbbVie, leaving enough headroom. We are expanding BD capability accordingly. Next slide. We have received many questions from shareholders lately asking why we launched the capital raising and about the timing. I'll explain that. The use of proceed is very clear, 90% will be allocated to fund a new strategic growth plan. With sufficient cash in hand, the royalty from Novartis and the partnership revenues, there is no need for a capital raise in the short-term for the internal organic growth. We are confident we can execute multiple partnership deals, but the revenue levels will fluctuate year-over-year. This is not a sustainable business for -- in the long run. The royalty-bearing COP department is expected to expire in 2026, with the possible expansion to 2020 -- 2035, but we should be conservative with the prospect. And development time line is very slow in the biopharmaceutic industry, and we should proactively plan ahead. Therefore, we decided we should acquire companies with sizable revenue-generating capability sometime soon. But a good company does not come cheap. We will proceed in 3 steps. The first step is to increase the capital to make a bank loan easier. We will borrow money once the target is fixed as we borrowed JPY 20 billion from Mizuho Bank for Heptares acquisition in 2015. This is the second step. The first step is the acquisition itself. We will convert the short-term loan to long-term loan with the lower interest rate, looking at the very attractive rate from the Japanese bank. Regarding the timing, we speculated the financial impact of the COVID-19 will linger on for a while and decided it is the best interest to raise money quickly under uncertain environment. In addition to the transformative acquisition, we will pursue other value-enhancing activities, including future-proofing our drug discovery platform by investing in the novel technologies, such as protein degradation; expanding beyond GPCRs into new drug target classes that leverages SBDD platform, initially on ion channels; in-licensing late-stage assets to Japanese market. Next slide. A search has commenced for the in-capital raising for the transformative revenue-generating acquisitions. Our core criteria, including minimum revenue threshold, JPY 5 billion per year and growing, bringing to JPY 10 billion revenue range quickly on a consolidated basis. Similar to previous acquisition, Arakis and Heptares, we expect the deal to generate a mid-term payback with strong ROI. We are not constrained with the therapeutic area and the sectors within health care, but multiple will be considered. Our aim is to build a scale business so that we can further accelerate the growth of the company. Next slide. Concurrent with the transformative acquisition research, we plan to future-proof our drug discovery platform by investing in a complementary platform technology as well as funding into the new drug target classes. On the left-hand side of the -- you'll see our current approach to drug discovery. Novel target ID has been driven by the scientific literatures and [ KOL ] interviews as we go after the best-in-class or first-in-class targets with good levels of validation. This approach has served us well for the past 5 years as we built a broad and deep pipeline with low-level attrition, in turn, driving multiple high-value balance sheets. However, drug discovery is an evolving concept and therefore, we must also evolve to stay at the forefront of the science. On the right-hand side, you'll see various boxes in green and these are the areas we're targeting for investment. Access to the greater database of patient information will drive smarter drug target ID in the future. We want to leverage all mix data for faster and [indiscernible] identification of novel targets. By combining this data, we hope to be able to validate a drug target selectively present in diseased tissues to increase on the chances of successful development with the safety and efficacy perspectives. In addition to the all mix data, we'll continue to invest in AI and machine learning approaches to further optimize the drug discovery processes. In the center, you will also see a plan to expand into the new target classes and platform, specifically ion channels, and the target protein degradation. While we still have over 200 GPCR targets to go after, we have built a powerful SBDD drug discovery platform with a cryo-EM where we can work on other protein target classes, and we intend to do that. Several very attractive but difficult target exists in this area, which was challenging. The details of these plans is best left for the R&D Day event. Next slide. With a highly skilled clinical development and regulatory teams in Japan, with a good track record of successful approval on commercialization, we intend to leverage a strategic asset to bringing more medicines with high unmet needs from global pharma and biotech to Japanese market. We aim to efficiently develop and bring the new product on the market by 2025. Okay. Next slide and the last slide. This summarize our corporate ambition: organic growth to live a leading drug discovery and development business; strategic growth from transformative acquisition; investment in the complemented data technology; expanding beyond GPCRs; in-licensing late-stage product for Japanese market. I look forward to reporting back to you at the end of the year results, and the strong progress we expect to make in the second half. Thank you for listening.